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So, just when you think the road to broadband stimulus rewards couldn’t get any bumpier, here comes the tax man. Seems like in all the hubbub of complex rules, sleepless nights, crashing Web servers and due diligence hell, everybody overlooked a random stimulus FAQ hinting that those grant winnings could be <gasp> taxable.

Oh, the humanity!

Ever reach that point in your life where so much crap is rolling downhill that eventually a story hits and triggers an uncontrollable laughing fit? I won’t laugh (don’t need the hate mail), but this is one of those moments. I mean, talk about a nest of ants at a picnic. You manage to make it to the top of the heap, you’re starting to contemplate the fruits of your labor and here comes a tap on the shoulder and “hey, you forget about us?” Damn!

It’s probably not accurate to say that we didn’t know taxes would be an issue. But the topic was definitely at the far back corners of our minds, as well as those of the media and other observers.Truth be told, it might not even have bubbled to the surface yet hadn’t some smart-grid stimulus winners started making noise about their money not showing up and it’s been months since their awards were announced.

So the big question is, now that we’ve been splashed with the cold waters of imminent, if not confused, taxation requirements at both the federal AND state levels, what next?

This will certainly become a pain for many unless someone in Congress steps in to add a tax exemption. Though I doubt we’ll see an exemption even be discussed by this august body, it would make for some serious D.C. entertainment. Think about it.

You would see Democrats become the Anti-Tax party, all in the name of facilitating economic development. That’d be one heck of a contortionist trick, well worth the price of admission. Republicans, who by and large oppose the stimulus, would be in a bind. They’re natural reaction is to rail against any taxes. They’ll have private sector allies that complain about taxes yet see this element of grant tax enforcement as one way to cripple a program they hate. More logic-defying contortions.

As for private-sector winners themselves, I think they’re getting tax attorneys to jump in to tell them how much of the tax bite they can avoid through deductions and accounting magic tricks. If the bite’s too large, some winners very well may walk away from the money.

The nonprofits and governments entities that won projects are the only ones really clear of this mess because, at the national level at least, since the IRS’ recent letter on the issue stated that these categories of organizations are exempt from taxes on grants.

The public-private partnerships are going to be in a tricky position because they’re both fish and fowl. I think it will depend on who’s the lead dog in the partnership as to what their tax exposure will be. Those for whom the public partner is there to facilitate things such as favorable right-of-way rulings, access to stakeholders and other relatively lightweight roles could face the full impact of whatever taxes are levied. Those where the public or nonprofit entity is an equal or lead partner are likely to be able to shield a decent portion of the grant from taxes.

Btw, I’m just a marketing guy who learned terms like “tax exposure” watching LA Law. Don’t call me from jail if you take any of my advice without talking to a professional tax person.

Those people who are applying for NOFA 2 will likely pause for a bit to consider again if they really want to roll this boulder up hill, unless they’ve been pondering this issue all along and have figured out a way to compensate in the budget for potential taxes. In general, I expect applicant’s reactions to be along the lines of the winners I described. The private sector may be more inclined to stay away, public-private partnerships will likely do some major re-arranging of the partnership to gain maximum tax advantage, and the nonprofits/governments will participate or not in Round 2 without being influenced by the tax question.

Who knew what when

I was asked earlier today what did applicants know about the tax issue and when did they know it. Are they being blindsided by the government or tripped up by their own inability to pay attention?

First, not everyone was surprised. Those who were attentive/paranoid about every little detail undoubtedly addressed this in their planning. The information was in NTIA/RUS’ FAQs that the grants were subject to taxation, though it addresses only Federal taxes. However, in the heat of the applications process, I’m pretty sure most people skimmed past it and didn’t think much about it.

I don’t think until last week, though, anyone gave a thought to state taxes. Everyone was kissing up to governors so hard, and governors were probably enjoying it so much, no one thought seriously about the fact this pesky issue was hanging out below the surface like a shark waiting to bite them in the butts. Check out this item on Maryland’s tax law related to grants for an example. We all know how desperate all states are for a buck, so don’t expect them not to jump on this with both feet.

Add the local tax factor to the equation in those states that want to make a big deal of getting their cut, the double whammy of Fed and state combined is going to cause a higher percentage to folks to start singing a little Kelly Clarkson, “Just Walk Away.”

Those people still planning to apply for NOFA 2 may want to tackle the issue up front. Ask your state for a tax exemption to help meet the 30% matching fund. Tell them they can get their tax cut from all of the economic development the network’s going to bring.